Happy Mother’s Day from all of us at Inc.’s 1 Smart Business Story. Today we have a weekend “long read” for you, and it’s a doozy. For Inc., legendary business journalist Bethany McLean decided to take a deep dive into the world of private credit, talking to informed sources and scouring financial documents—and what she found is setting off alarm bells in her mind.
McLean, who famously raised serious, prescient questions about Enron, starts her report in February, when Blue Owl Capital’s co-CEO told investors there were “no red flags” in private credit. Apparently, investors were unpersuaded, because less than two months later, they asked to pull more than $5 billion from Blue Owl’s funds, and the firm’s stock tanked.
Still, industry leaders continue to insist that skepticism of private credit is overblown, while critics warn it's a slow-motion liquidity crisis waiting to unfold. Who is right? And how might this affect your company? McLean examines a $3.5 trillion market built on trust, opacity, and heavy deal volume, and offers insights into how we got here and what might come next.
In this piece, you’ll learn:
The underappreciated causes of the private credit boom, including both the unexpected effects of the regulations instated after the 2008 financial crisis and the business model change in the private equity industry
How big is the “AI risk factor” for companies financed by private credit
Three financial truths the private credit industry seems to ignore
Bethany McLean: I’m Worried About Private Credit. Here’s Why
The co-author of ‘The Smartest Guys in the Room’ rings the alarm about the incentives that fueled the private credit boom, who’s at risk, and where it could rock the economy.
“We don’t have red flags. In point of fact, we don’t have yellow flags. We have largely green flags.” So said Marc Lipschultz, the co-CEO of Blue Owl Capital, one of the major purveyors of private credit, on the company’s early February earnings call.
Less than two months later, Blue Owl admitted that investors asked to get back over $5 billion of the money that they’d committed to Blue Owl’s funds. Blue Owl, which itself is publicly traded, has seen its stock fall almost 70 percent from its peak in January 2025. (Overall, Blue Owl declined to comment on the record, but did comment on a specific transaction, which is detailed below.)
The discrepancy between Lipschultz’s words and investors’ desire to get their money out is just one anecdote from the debate that is raging about the future of private credit, a business that has come from pretty much nowhere to be a defining feature of the American financial landscape, with an estimated $3.5 trillion in assets globally. While disagreement is the nature of markets—there are buyers and sellers—the extent of this one is profound. It’s almost a religious war.
Like Lipschultz, other industry executives say everything is perfect. “There’s nothing that’s flashing anything other than green right now,” Michael Arougheti, the co-founder and CEO of Ares, another major private credit lender, said. “For the 30-plus years I’ve been investing in credit, there’s nothing in those numbers that screams a credit crisis is coming.” Apollo’s president, Jim Zelter, said that markets have “lost the plot” on private credit. It’s a “media spin cycle,” said Jonathan Gray, President and COO of Blackstone, who added that he has “never seen something so disconnected from reality in finance” than worries that private credit will spark another financial crisis.
Some critics say it will do precisely that. “It’s 2007 for Private Credit,” posted Jeffrey Gundlach, the famous bond investor who runs DoubleLine Capital. “We think a ‘run on the bank’ is inevitable and would recommend all investors to get out of levered private credit while they still can,” wrote the well-respected hedge fund manager David Rosen, who runs Rubric Capital Management, in a letter to his investors that has been widely shared. “This is the story of a $2.0+ trillion market on the precipice.”
It is impossible for outsiders to say with certainty who is right, because private credit is by definition and design inscrutable. “Such lending is effectively hidden from public view,” wrote the famous economist Paul Krugman. The companies that receive the loans are private, so they don’t have to file financial statements, and there is no public market for the loans themselves. “Many of the investments in our products are illiquid and thus have no readily ascertainable market prices,” as Blue Owl’s 2025 annual report warns. “We value these investments based on our estimate, or an independent third party’s estimate, of their fair value as of the date of determination, which often involves significant subjectivity.”
So when executives tell us we have to trust them, actually, the decision is binary. Either you trust them, or you don’t. Which is fast becoming a problem in several ways.
First, they’ve given us lots of reasons not to trust them.
Second, this now matters a great deal. It matters to smaller companies that have come to rely on this system to provide credit. It matters to the people who have invested their savings in private credit. It matters to people who didn’t intend to have their financial future enmeshed with private credit but do anyway.
In short, it matters not just for the financial system, but for the whole economy.
How bank regulation and surprising IPOs created private credit
One way to think about private credit is as an example of the unintended consequences of regulation. In the wake of the 2008 financial crisis, lending limits for banks were tightened. That opened the door to other credit providers.
Theoretically, private credit is actually an improvement on bank lending. A bank run starts with a timing mismatch. Banks lend money to companies over a long period of time, but depositors, who fund some of the lending, may want their money back tomorrow. Even a perfectly solvent bank can run into trouble if depositors demand their money back all at once.
Investors in private credit, on the other hand, agree to have their money locked up for a specified period, which means that the funding is matched, and there cannot be a run. Presto! Problem solved. “Retirement and investment funds…can be fully matched to corporate and asset-backed loans,” as Apollo’s marketing material put it.
The regulatory changes that made it more difficult for banks to lend coincided perfectly with another dramatic change in the market. Private equity firms, companies like KKR, Blackstone, and Apollo, whose business had been taking publicly traded companies private, themselves sold stock to the public.
Being public changed their business model, from one in which they cared about the returns they gave investors to one in which they cared more about investing money as quickly as possible—because that’s what generates fees. “As soon as the money gets lent out, that capital becomes more valuable than any other investment they can make,” wrote Rubric Capital’s Rosen. “They have every incentive to raise as much private credit capital as possible and deploy it as quickly as possible.”
Growing assets required new products, so in addition to their traditional businesses—investing money from big institutions like Yale’s endowment in the equity of companies they took private—they began to fill the space vacated by the banks and launch so-called private credit funds, to invest in the debt of those companies too.
At the same time, another spin on private credit began to proliferate. So-called BDCs, or business development companies, which issue stock and use that money to lend to businesses, have been around for a long time. Several, including funds run by PE giants Ares and Apollo, went public in 2004. But BDCs were niche products—until the post-financial crisis years, when they flooded into the space previously occupied by banks.
BDCs became so popular because they were another way that public private equity firms (which maybe should be an oxymoron) could keep their fee income stable and growing. First, traditional private equity funds have a set life, at which point the firms must raise a new fund to keep collecting fees. But BDCs are meant to be permanent, and thus an evergreen source of fees.
Second, old regulations designed to help smaller companies, which often have weaker credit, get capital permit BDCs to raise money from retail investors. In the past, private equity firms would have considered that grubby. (Retail!) But as institutions have become more reluctant to commit their money to private equity, the firms have become increasingly desperate to get their hands on the trillions of dollars of retail money that can’t invest in traditional private equity due to regulations preventing those products from being sold to “unsophisticated” investors.
BDCs were a way in.
Blue Owl took BDCs big
The company that effectively industrialized the BDC model is Blue Owl, which was conceived in 2016 at the Putnam Restaurant in Greenwich, CT. All the principals came out of bigger private equity firms: Doug Ostrover was a top sales guy at Blackstone, Craig Packer was a Goldman Sachs partner; and Lipschultz came from KKR. The firm began launching BDCs in rapid-fire fashion.
Today, two of them are publicly traded—Blue Owl Capital and Blue Owl Technology Finance—while the others remain private. Both private and publicly traded BDCs raise their money by selling shares to investors, but in the public ones, investors can buy and sell shares whenever they want, whereas the private ones have periodic repurchase programs in which investors can get their money. The advantage of a public one is, again, fees that can be permanent. But because investors can buy and sell the shares, there’s a market price. The advantage of private ones is that the firms can value the assets using models.
Blue Owl, which collects fees from all the funds it manages, grew incredibly rapidly. Its assets under management soared from $94.5 billion at the end of 2021 to $307.4 billion at the end of 2025. The Wall Street Journal described its strategy as “get big fast.”
Others piled in too, launching both publicly traded and privately held BDCs. Blackstone launched a fund called BCRED, as did Apollo, KKR, Carlyle, and on and on. All the cool kids had BDCs.
The firms marketed their products to retail investors as “semi-liquid,” which is basically saying you can have a glass of water whenever you want, but as soon as you try to pour it, you discover it’s ice. Investors can withdraw a maximum of 5 percent of the fund’s total value in a quarter before the fund puts up a so-called “gate,” in which no one can have any more of their money at that time.
So long as no one wants their money back, people can get it back. But if everyone wants their money back, no one is going to get much of it, at least not when they want it.
BDCs were hugely lucrative, at least for the firms and the people who ran them. The growth made their stock prices shoot higher, with Blue Owl hitting a peak of $26.68 in January 2025. Blackstone’s BCRED fund became its single largest source of fees, representing about 13 percent of the firm’s overall fee revenue; Blue Owl garnered around 40 percent of its assets under management from individuals, who accounted for about one-fifth of its total fee-related revenues, more than any publicly traded rival, according to Goldman Sachs.
“The amount of capital they’ve raised and the breakneck expansion into new products in such a short time period is insane,” says one analyst who follows the space closely. In a recent report, Greg Obenshain at Verdad Capital noted that private credit loans grew by 11.5 percent each year since 2010, while the high-yield bond market and the investment-grade bond market grew just 3.1 percent a year.
As the assets mushroomed and the stocks of their publicly traded parent companies soared, they all paid themselves plenty. Apollo’s Zelter, Blackstone’s Gray, and Ares’s Arougheti became centimillionaries many times over, or even billionaires. The Blue Owl founders were all billionaires on paper; Ostrover and Lipschultz even led an investment group that bought a majority stake in a sports team, the NHL’s Tampa Bay Lightning, secured by a margin loan from Blue Owl itself. (Blue Owl just disclosed that they are no longer using their shares as collateral for any loans.)
It transformed the economy. Over the past decade, private equity firms have done an estimated $600 billion in buyouts of software companies, like Vista Equity’s roughly $4 billion buyout of Pluralsight, and Vista and Elliott Management’s $16.5 billion buyout of Citrix.
Those deals could not have been done without private credit—and without a willingness to lend on far more aggressive terms than had ever been acceptable in the past. Blue Owl, in particular, bragged that its strategy for one BDC, Blue Owl Technology Finance (OTF), was centered on so-called “ARR loans,” or annual recurring revenue loans. These were loans made to companies that didn’t make money, the idea being that the revenue growth would eventually become profitable.
“Portfolio Strategy—Recurring Revenue Loans,” read a slide in one investor presentation. It went on to say that “recurring revenue lending has gradually become a meaningful part of the direct lending market” and said that OTF’s recurring revenue portfolio was 12 percent of its total exposure.
Three financial truths private credit ignores
There is no single comprehensive data set on private credit’s reach, but Federal Reserve data shows that a majority of private credit loans go to companies backed by private equity sponsors, underscoring how deeply the asset class is intertwined with the buyout industry.
Amid the get-rich-quick mentality, everyone seems to have forgotten a couple of basic rules of financial history. One is that fast growth in finance isn’t a good thing. When something is growing like a weed, it usually is a weed. Or as Warren Buffett said once, “What the wise do in the beginning, fools do in the end.”
Another is that higher yields, like those promised to investors in BDCs, usually mean higher risk.
The third lesson is that on Wall Street, innovation starts off as a beautiful thing—and ends in tears. By promising retail investors that they could get at least some of their money back, Wall Street killed, or at least maimed, the goose that laid the golden egg. Private credit could have been a better mousetrap for lending if firms had stuck to the original promise of matched funding.
But if you design products that make people think they can get their money back, and then you say, no, no, the actual rules mean we can keep your money, people are going to be scared and worried. “We believe poor incentives led to an industry that grew too fast and began marketing its assets to the wrong investors,” wrote Rubric Capital, which added that any promise of liquidity “will almost certainly prove ephemeral in any modest period of stress.
A system under pressure
Modest stress would be an understatement for what’s happening now. The questions began in earnest when two companies with private credit—first, a subprime auto lender called Tricolor that was not a private equity buyout, and then an automotive parts company called First Brands—went bankrupt last September. Accounting professor Ben Laurie told the Guardian that the fear was that the private debt market had been giving out money at high interest rates to companies that just can’t pay it back.”
“When you see one cockroach, there’s probably more,” said JPMorgan CEO Jamie Dimon.
Blue Owl’s Lipschultz promptly dismissed the sniping as “an odd kind of fearmongering.”
But those are not the only cockroaches. In early 2026, the so-called SaaSpocalypse, the fear that AI would destroy software businesses, swept through the market like a forest fire. Publicly traded software stocks plunged. Since the end of September 2025, an index that tracks software stocks has fallen more than 30 percent.
The question is to what extent private credit firms are avoiding facing reality. Scott Goodwin, co-founder of credit investment firm Diameter Capital, says an “AI risk factor” affects over half of the deals made by private equity and financed by private credit over the past 10 years. UBS said private loan defaults could reach 15 percent in a worst-case scenario. Defenders, like investment bank Lucid Capital Markets, say the worry is misplaced, and that “doomsayers” may be overstating the risks. The truth is, no one actually knows.
Most recently, Market Financial Solutions, a UK-based property lender that was also funded by big private credit lenders, including Apollo, collapsed into bankruptcy amid allegations of fraud.
The fundamental question is this: Were lenders doing their homework?
The shakiness of the ‘trust us’ narrative
To believe the private credit executives, you must believe that in a period where buyouts were being done at higher and higher prices and lenders were extending credit like it was candy, mistakes weren’t made. That’s hard. Christian Stracke, an executive at Pacific Investment Management Company, dubbed it “a crisis of really bad underwriting” on a recent podcast. Rubric Capital’s Rosen wrote that “as part of our diligence on the levered private credit sector, we spoke to a manager of a private BDC that we hold in high regard . . . he lamented that the underwriting standards in 2025 were the worst he has seen in his 25 years in the finance industry.”
Nor do the numbers look good. Veritas Investment Research did a detailed analysis of 6,250 PE-backed companies to better understand the typical private credit borrower. They concluded that overall, the companies produce close to zero free cash flow once they fund necessary capital expenditures.
In other words, there’s very little money left over should they have to refinance at a higher rate or spend more on capex. A recent IMF/Moody’s analysis suggests that around 40 percent of private credit borrowers have negative free cash flow.
You also must be willing to look past the evasions of private credit executives. Many were less than honest about the extent of their exposure to the software sector. They used wiggle room in definitions—is a company that provides software to the healthcare industry, a software company, or a healthcare company?—in order to minimize it.
“The way in which [private-credit funds] classify their sector exposures is not uniform,” Barclays analysts said in a report. “This sector ‘massaging’ generates concern from the investor community and makes it difficult to assess degrees of true diversification across funds.”
Bloomberg, which did a deep dive, determined that “at least 250 investments, worth more than $9 billion, weren’t labeled as loans to software firms by one or more of the BDCs, even though the companies borrowing the cash are described that way by other lenders, their private equity sponsors, or the firms themselves.”
A large share of private credit loans includes something known as a pay-in-kind feature, or a PIK. That feature, which hadn’t really been seen since the days of Drexel Burnham’s Michael Milken and the first junk-bond boom in the 1980s, allows companies to defer cash interest and increase their debt instead.
“We’re doing these on purpose,” Craig Packer, the co-president of Blue Owl Capital, has said. “We generate really good returns. We’ve had great success.”
But there’s wiggle room here, too. Analysts call it “bad PIK” if a company that was paying cash starts PIKing, because it is a sign of stress. Analysts also think it’s a risk factor if a company is PIKing on one piece of its debt, albeit not all of it. Rosen says in his letter that one major fund reports that only 4 percent of its loans are PIK-ing. But, he says, almost a quarter of all the assets in its portfolio have one tranche of debt that is PIKing, even if those aren’t the tranches the fund owns. That’s a different level of risk than the headline number implies.
And there is no easy way to ascertain exactly how much risk there is.
To read more from Bethany McLean on Blue Owl, private credit’s sins of omission, and why one investor calls this “financial gaslighting,” try a 30-day trial to Inc.com
Five More Smart Business Stories:
“How Peptides Conquered the Internet” (Search Engine)
“Inside the Cutthroat Community of ‘Clippers’” (The Verge)
Advertisement:
Imagine turning down Uber at $10M—only to see it IPO at $80B.
That’s what happened to Mark Cuban… a 799,900% return, gone.
But Kevin Harrington built his reputation by spotting such opportunities early.
Like Uber turned vehicles into income-generating assets, Mode is turning phones into income streams, and you can still invest before they potentially go public.
Potential Uber return for Marc Cuban does not take into account dilution.
The Deloitte rankings are based on submitted applications and public company database research, with winners selected based on their fiscal-year revenue growth percentage over a three-year period in 2023.
Please read the offering circular at invest.modemobile.com. This is a paid advertisement for Mode Mobile’s Regulation A Offering.